Modelling Framework

FEEM SI computation operates within a recursive-dynamic computable general equilibrium model, ICES-SI (Inter-temporal Computable Equilibrium System for Sustainability Index), which provides the elements to derive each indicator over time and for different scenarios. ICES-SI is a refinement of the ICES model, traditionally used for the economic assessment of climate change impacts and policies.

Computable General Equilibrium models belong to the field of macroeconomics. Economic agents (consumers/households and firms) have microeconomic stylised assumptions, as they aim to maximise their objective functions, consumption and profits, respectively. The images below describe the behaviour of:

  • representative cost-minimising firm in each productive sector in each region. Total output is obtained using all available inputs, which include primary factors (natural resources, land, labour, capital, energy) and intermediate goods

  • representative households in each region. Once received the income remunerating ownership of primary factors, it is then employed to finance three alternative uses: private consumption, public consumption and savings.

The main value added of these models is that they consider the interconnections among markets, both within a country and internationally. In fact, the realism of the economic system is given by the construction of production functions and market interactions according to input-output matrices. Each producer uses some shares of all available commodities and primary factors; in turn, sector output is bought from all other sectors in the economic system. Shares depend on the national economic system, as they are calculated and calibrated in line with observed data.

Also relevant, economic trends are interlinked through the recursive-dynamic feature and specific assumptions on investment allocation that redirect, endogenously, money in those countries where it is more profitable.

FEEM SI calibration year is 2007. Main data come from the GTAP 8 database, an economy- and worldwide economic database. GTAP 8 has been opportunely extended to consider social and environmental indicators. This requires a two-step procedure. First, we modify the economic structure of the database in order to further detail the original sector decomposition; second, we add as many new variables as required so as to initialise the level of indicators, not initially included in the database (namely, almost all social and environmental indicators). Main changes are as follows:

  • Detailed breakdown of the public service sectors to extrapolate education and private/public health;
  • Upgrade of the energy sector with detail for renewable and alternative energy sources;
  • Introduction of: Kyoto GHG emissions (CO2, CH4, N2O, PFCs, HFCs, SF6); Animal and Plant species to account for biodiversity; Water use by sector (agriculture, industry, services); Electricity and ICT access; Land (inhabitable) surface to define population density; Waste and Raw Materials.

The current model aggregation considers 40 world regions, whose description can be found in the regional aggregation table.

To find out more about the Modelling Framework, browse through the publications' section.